Monday, June 8, 2009
Last week, the press really hammered at the unemployment rate growing to 9.4% - so much so, that it overpowered the more benign news (maybe even good news!) of a far-smaller-than-expected 345,000 drop in the nonfarm payroll.
The slightly more current information is buried in the nonfarm payroll report, which shows a declining pace of job destructiong. I really don't get the reluctance to internalize the "less bad" news: the unemployment rate depends on two things: the number of unemployed and the size labor force (which is unemployed plus employed), which makes it more of a lagged indicator.
In May, the labor force grew for the second consecutive month, +350,000. To be sure, those individuals went straight into the unemployed category, which helped to drive up the unemployment rate. But my point is this: that there will be fluctuations in the labor force that can grow the unemployment rate even after the nonfarm payroll is not falling anymore.
The chart illustrates the change in nonfarm payroll, and the unemployment rate at a 3-month lag (i.e., for each payroll shift, the associated unemployment rate is three months into the future). The correlation among this series is -0.33, while the correlation among the contemporaneous series is just -0.18 (current unemployment rate and current nonfarm payroll change). Shifts in the unemployment rate tend to lag the nonfarm payroll.
The fact that nonfarm payroll declined at a slower pace is a good sign. But don't get your hopes up: initial unemployment claims are well above the level that suggest jobs will be added next month... And furthermore, two economists at the Fed predict a significant "jobless recovery".